Bank of Canada says housing-market crash not in the cards

NEW YORK (Reuters) - The Bank of Canada does not foresee the sort of sharp rise in joblessness or mortgage rates that would trigger a major housing market correction, Governor Stephen Poloz said on Thursday.

Speaking to reporters in New York a day after the central bank said it estimates the Canadian housing market could be overvalued by 10 to 30 percent, Poloz said the probability of such a big drop in prices is low.

“The risk comes when some catalyst sets off the vulnerability,” he said. “In this case it would be, let’s say, a rise in unemployment, a significant one, where it makes people have difficulty paying for their mortgage, or a rapid rise in mortgage rates, neither of which we’re expecting.”

He also told a Economic Club of New York business audience that he does not see a housing bubble. “We don’t think we suddenly became over-valued in a bubbly-type way. We don’t think of this as a bubble in any way.”

Poloz shed more light on central bank thinking in a Maclean’s magazine interview published on Thursday in which he explained why he often talks more about economic negatives than positives.

“Given what we’ve been through and the process of serial disappointment, it’s natural to be more concerned about the downside than the upside,” he said.

He added that because of low interest rates, there are few policy tools left to deal with falling inflation, should it re-emerge.

“So I think it’s natural for someone like me to talk a lot more about those negatives, and not dismiss the positives, but say, ‘Well, I need to see four, five or six of those in a row to be convinced that I don’t have to worry as much anymore’.”

Speaking in New York, he said a return to sustainable economic growth, which he estimated is two years away in Canada, would require continued financial innovation.

While global regulatory reform has been essential, he said, the net effect of that probably means a reduction in credit availability, which means greater innovation will be needed to facilitate growth, provided it does not pose new or growing risks to the financial system.

Poloz pointed to the need for expansion and innovation in bond financing; securitization to create new high-quality, low-risk products; peer-to-peer lending; and public-private partnerships.